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Tuesday, February 24, 2009

How Not To Practise The Ancient Art Of Verbal Intervention

Let's flash back quickly to yesterday (Monday). The big news of the day (at least as far as Central and Eastern Europe went) was that East European central banks had reached an agreement to try to bolster their currencies via their first coordinated action since the spread of the global financial crisis.

Czech, Polish, Hungarian and Romanian central bankers all agreed to speak publicly about the effects of the exchange-rate swings, according to Romania’s central bank Governor Mugur Isarescu at a news conference in Bucharest. His counterparts in Prague, Budapest and Warsaw issued similar statements during the afternoon. The four currencies all gained significantly on the day. The Hungarian central bank even kept interest rates on hold to boost the currency, even though this will lead to an even sharper economic contraction and even higher unemployment. But how long did it last?

Well, now fast forward to today, and a press conference in Brussels, attended by EU Commission President José Manuel Barroso and Hungarian Prime Minister Ferenc Gyurcsany. The message was meant to be that the Hungarian government was on the right path, and was going to receive full backing from the European Union. And how did our good prime minister "talk up" the currency?

"We're in serious trouble indeed," the Hungarian prime minister said.

And how did the forint react?

The sell-off on the forint market was almost immediate, and the Hungarian currency abruptly and sharply fell to over 303 to the euro from its earlier and hard won level of 297.

True all the talk about Latvian downgrades (see this post) and East European weakness didn't help, and the kind of verbal strategy decided on yesterday was always a sign of strength rather than a sign of weakness. As Danske Bank said in a report yesterday:

The markets might try to test whether this is just verbal intervention or whether the CEE central banks would be willing, for example, to hike rates to defend their currencies. The markets will be watching over the next days for more direct intervention in the CEE FX in the form of coordinated intervention and/or rate hikes. However, if they see that the talk is not being backed up by action, the depreciation of the region’s currencies could resume.

Still, you might have thought the policy would have lasted a little longer than 24 hours, and that the Hungarian people would have been a bit better served by their leaders.

Monday, February 23, 2009

Hungary's Central Bank Puts Interest Rate Reductions On Hold

The Hungarian central bank kept its benchmark interest rate unchanged today following four cuts in last three months. The principle reason for the standstill was the growing problems associated with the forint’s decline, which outweighed concerns about rising unemployment and slowing growth. The Budapest-based Magyar Nemzeti Bank, led by President Andras Simor, left the two-week deposit rate at 9.5 percent. Hungary raised rates dramatically in October in an attempt to defend the forint and while the government sought international financial aid to contain default fears.

This was no easy decision since the government already expects the economy to shrink by 3.5 percent this year and as inflation falls real interest rates rise, which means the bank is tightening monetary policy into the crisis even as the government reduces spending in order to address long standing fiscal deficit concerns. The bank now expects the inflation rate to fall to between 3.1 percent and 3.4 percent this year and to between 1.5 percent and 1.9 percent in 2010 from 6.1 percent last year. Today's decision make it likely the economy will now contract more than anticipated, and a 5% contaction is now a fair benchmark to work from, in which case the government will once more need to make a fiscal adjustment or risk a higher than anticipated deficit. There is no easy decision here, and the Hungarian economy is truly between a rock and a hard place. The forint has lost around 25% over the last six months, and dropped to a record low of 309.71 on February 17.

Wages Hold More Or Less Steady

Average earnings in Hungary rose at rates which were only just above the inflation rate in December, with average gross earnings rising by 4.6%, just 1.1% above the rate of inflation, but if we think of the real value of those wages in euro, rather than in forint, terms, then we will see that since the value of the forint was very little changed year on year in December, very little progress has actually been made in restoring competitiveness to Hungary's industrial sector.

So keeping inflation in check following the recent sharp devaluation could be one of the factors in the minds of the central bankers at this point.

Industrial Output Falls Sharply In December

Hungary's industrial output plummeted by 15.1% month on month in December, according to the latest data from the Central Statistics Office (KSH). In annual terms output fell by 23.3% according to working day adjusted figures. The detailed data make the reasons for the dramatic fall in output clear enough - the export-oriented component of Hungary's manufacturing industry came to a screeching halt in the last weeks of 2008.

A month-on-month decline on this scale is unprecedented in the history of Hungary's industrial statistics, this is the largest drop ever recorded. For 2008 as a whole, industrial output dropped 1.1% . Hungary's industrial production has now fallen back about four years and it levels attained around the start of 2005.

Hungary's industrial sector has been slowing since the start of 2008, and the January data are probably even worse, given the gas crisis associated with the Ukrainian-Russian pricing dispute which caused substantial production halts.

And the January number does indeed looks likely to be even worse, since Hungary's manufacturing purchasing manager index (PMI) fell once again to a all-time low of 38.6 in January, down from 40.8 in December, according to the Hungarian Association of Logistics, Purchasing and Inventory Management. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hasd been above the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year.

The January figure is the lowest recorded since September 1995 and is a further sharp drop from December. The last time the January index was below 50 was in 2005 (48.5) and then in 1997 (49.1), but these contraction were much softer.

Construction Stable, But At A Very Low Level

Hungary's construction industry activity was up by 5.5% year on year in December 2008, following a 2.7% rise in November, according to the most recent data from the Central Statistics Office. According to data adjusted for working days, the increase was 3.2%. There was a 0.6% month-on-month rise in output in Deecember, following a 1.2% growth in November.

The stock of new orders in 2008 was down 11.8% for construction as a whole, with a 35.4% year on year contraction for building orders and a 25.6% growth for civil engineering ones.

Retail Sales Continue To Slide In December

Hungarian retail sales fell by 0.8% month on month in December, as compared with a 0.4% drop in November, according to calendar and seasonal adjusted data from the Central Statistics Office. According to calendar data there was a fall of 3.9% over December 2008, as compared with a 2.0% annual decline in November.

Retail sale of cars and car parts plunged by 19.7% year on year in December, following a 21.3% decrease in the previous month. For 2008 there was a decrease of 7.8% over 2007.

According to a Eurostat first estimate – based on seasonally and calendar adjusted data –, retail sales in the European Union continued to decline in December 2008. The rate of decline was 0.8% on average in the 27 member states of the European Union and 1.6% in the Eurozone compared December 2007. The average volume of retail index for 2008, compared to 2007, increased by 0.1 in the EU27 but it fell by 1.4 in the euro area. In Hungary the retail index dropped from 139.9 in 2007 to 136.8 in 2008, or by 2.2%.

Sunday, February 22, 2009

Let The East Into The Eurozone Now!

“It’s 20 years after Europe was united in 1989 – what a tragedy if you allow Europe to split again.”
Robert Zoellick, World Bank president, in an interview with the Financial Times

(Click On Image To View Video)

World Bank president, Robert Zoellick, made a call this week - in an interview with the Financial Times - for a European Union-led and co-ordinated global support programme for the economies of Central and Eastern Europe. I agree wholeheartedly, and even if I have, reluctantly, to accept the point made last week by our Economy & Finance Commissioner Joaquin Almunia that our pockets, though deep, are certainly not bottomless (and thus it is probably beyond our means right now to rescue the non-EU Eastern states), I still feel we should make good on our responsibilities to those who are EU members, and to do so by opening the doors of the Eurozone to those who wish to join. Since this proposal is fairly radical, the justification that follows will be lengthy.

This is not a view I have arrived at lightly, but looking at the extent of the problem we now have before us, a problem which is growing by the day, and taking into account the fact that the origins of the economic crisis in the East must surely rest (at least in part) in the decision to make euro participation a condition for EU membership for these countries (a possibility which was subsequently withdrawn in the critical moment, when the going started to turn rough), and then assessing the risk to the Western European banking system which would be posed by simply sitting back and watching it all happen, I think this move is not only the least damaging of the policies we can now follow, it is the in effect the only viable path left to us if we are to keep the eurozone as an integral entity together.

If this proposal were accepted a new set of membership criteria would need to be drawn up, of course, but the underlying principle would have to be one of offering the certainty of entry as guaranteed forthwith, for those who chose to accept. Rules were made to be broken, and nothing should be so inflexible - not even the Maastricht eurozone membership criteria - that it cannot be ammended as circumstances dictate. And at this point even the undertaking that this - like the long awaited US Stimulus programme - was on the table, would be sufficient to provide immediate, and much needed relief. Flirting with doing nothing here is, in my opinion, flirting with disaster, both in the East and in the West.

Existing Maastricht Criteria

Convergence criteria (also known as the Maastricht criteria) are the criteria for European Union member states to enter the third stage of European Economic and Monetary Union (EMU) and adopt the euro. The four main criteria are based on Article 121(1) of the European Community Treaty. Those member countries who are to adopt the euro need to meet certain criteria.

1. Inflation rate: No more than 1.5 percentage points higher than the three lowest inflation member states of the EU.

2. Government finance:

Annual government deficit: The ratio of the annual government deficit to gross domestic product (GDP) must not exceed 3% at the end of the preceding fiscal year. If not, it is at least required to reach a level close to 3%. Only exceptional and temporary excesses would be granted for exceptional cases.

Government debt: The ratio of gross government debt to GDP must not exceed 60% at the end of the preceding fiscal year. Even if the target cannot be achieved due to the specific conditions, the ratio must have sufficiently diminished and must be approaching the reference value at a satisfactory pace.

3. Exchange rate: Applicant countries should have joined the exchange-rate mechanism (ERM II) under the European Monetary System (EMS) for 2 consecutive years and should not have devaluated its currency during the period.

4. Long-term interest rates: The nominal long-term interest rate must not be more than two percentage points higher than in the three lowest inflation member states.

The Dimensions Of The Problem

European governments, the European Union and international financial organizations need to act fast on risks stemming form banks’ exposure in the eastern part of the continent to avert an escalation of the credit crisis, Nomura Holdings Inc. said. East European countries are struggling to refinance foreign- currency loans taken out by borrowers during years of prosperity through 2007, when economic growth averaged at more than 5 percent. The International Monetary Fund, which has bailed out Latvia, Hungary, Serbia, Ukraine and Belarus, warned on Jan. 28 that bank losses may widen as “shocks are transmitted between mature and emerging market banking systems.” “Swift action is needed to restore confidence and prevent trouble” to financial and economic stability in the euro region and emerging Europe, said Peter Attard Montalto, an emerging markets economist at Nomura International in London. “Any move should be quick. The situation has begun to decline more rapidly since the end of last year and there is risk that any action may come too late.”

Robert Zoellick is far from being a lone voice in the wilderness about the current level of risk to the coutries in the East, and indeed precisely those EU banks who have been most active in emerging Europe are now busily trying to convince EU regulators, the European Central Bank and Brussels itself to coordinate new measures to counter the impact of the financial crisis confronting the region. The problem in the East certainly now adds a new dimesion to the problems facing us here in Europe, since West European governments are now being simultaneously hit on a number of fronts, and the situation is become more complicated by the day.

In the first place most West European economies are now either in or near recession, and their domestic banking systems are, to either a greater or a lesser extent, struggling. The West European states are thus, by and large, already feeling stress on their own sovereign borrowing capacities. But, with greater or lesser effectiveness, these countries are still able to increase their debt, even if sometimes the surge in borrowing is very dramatic, as in the case of Ireland, which will see gross debt/GDP shooting up from 24.8% in 2007 to a projected 68.2% in 2010 (EU January 2009 Forecast).

The situation in Eastern Europe is very different, and their economies and credit ratings evidently can't support such dramatic increases in their debt levels. Thus, in the case of those countries with a significant home banking presence, like Latvia's Parex, or Hungary's OTP, the support of external organisations (the IMF, the World Bank, the EU) becomes rapidly necessary when the bank concerned starts to have liquidity problems. But as a result of the consequent bailout the debt to GDP ratio starts to rise in a way which then places even subsequent eurozone membership in jeopardy. Latvia's Debt/GDP is, for example set to rise from around 12% of GDP in 2007 to over 55% in 2010. With a 10% plus GDP contraction already in the works for 2009, it is clear that Latvia's debt to GDP will rise beyond the critical 60% level. Hungary's debt/GDP is already above, and rising. If we don't do something soon, these two countries at least are being launched off towards sovereign default.

But the other half of this particular and peculiar coin turns up again in a rather unexpected way, and that is in the form of those West European banks who have subsidiaries in CEE countries, and who find now themselves faced, not with bailouts, but with ever rising default rates. This difficulty evidently and inevitably then works its way back upstream to the parent bank, and to the home state national debt, as the bank almost inevitably needs to seek support from one West European government, or another (in fact Unicredit, which has difficulty getting money from an already cash-strapped Italian government is talking of applying for support from the Austrian government via its Austrian subsidiary).

Austria is, in fact, a very good case in point here, since, as Finance Minister Josef Proell recently indicated, the country had some 230 billion euros of debt outstanding in Eastern Europe, equivalent to around 70 percent of Austria's GDP. The Austrian daily "Der Standard" have also reported the analysts view that a failure rate of 10 percent in Eastern Europe's debt repayments could lead to serious difficulties for Austria's financial sector. And this is no hypothetical "what if" type problem since the European Bank for Reconstruction and Development (EBRD) has estimated Eastern Europe's bad debts could go over 10 percent and could even reach 20 percent in the course of the current crisis. Underlining the mounting concern in Austria, Proell tried last week to convince EU finance ministers to provide 150 billion euros is support to CEE economies as a first step in trying to contain the growing wave of defaults.

The total quantity of debt outstanding is hard to put a precise number on, but the Bank for International Settlements estimated that, as of last September, more than $1.25 trillion had been leant by eurozone banks, and if you add in U.K., Swedish and Swiss bank liabilities the number rises to $1.45 trillion.

Western Europeean banks have a very important market share in the East, ranging from a low of 65 percent in Poland to almost 100 percent in the Czech Republic. This basically means two things, that the region's businesses and consumers are extraordinarily dependent on uninterrupted capital inflows from the West, and that some West European banking systems are extremely sensitive to rising default rates in the East. Of course the problem goes beyond the EU's borders, and while EU bank market shares in the Community of Independent States is rather less significant than in the EU12, due to the still substantial domestic ownership which exists there, exposure to defaults is not unimportant, especially in Ukraine, Kazakhstan and, of course, in Russia itself. Further, there is South East Europe to think about, and countries like Serbia and Croatia.

Large Banks Take The Initiative

Getting near to desperation, some of the largest banks involved - Italy's UniCredit and Banca Intesa, Austria's Raiffeisen International and Erste Group Bank, France's Societe Generale and Belgium's KBC - have launched a common initiative to try to lobby for an EU wide solution to the problem.

UniCredit is the largest lender in Poland and Bulgaria, while Erste is number one in Romania, Slovakia and the Czech Republic, with KBC occupying the position in Hungary, Intesa in Serbia, and Raiffeisen in Russia and Ukraine. Hungary's OTP Bank, emerging Europe's number 5 lender and the largest one in its home country, does not formally belong to the group. On the other hand OTP is actively looking for support.

OTP Bank Nyrt., Hungary’s biggest bank, said it’s in talks over a “role” for the European Bank for Reconstruction and Development, as it announced a 97 percent drop in fourth-quarter profit and “substantial” job cuts. As well as a possible EBRD involvement, OTP may also seek funds from Hungary’s emergency loan package from the International Monetary Fund, the European Union and the World Bank to “better serve the economy,” Chairman and Chief Executive Officer Sandor Csanyi said at a press conference in Budapest today. “There’s a chance the EBRD will assume a role in OTP, but I must stress that we plan no issue of new shares,” he said. OTP “doesn’t need to be saved,” Csanyi added.
Chancellor Angela Merkel, while expressing support for the bank initiative, has stopped short of offering concrete assistance or suggesting measures beyond those which are already in place.

The president of the European Bank for Reconstruction and Development, Thomas Mirow, wrote in the Financial Times this week the bank proposals "deserve full support as a worsening crisis in emerging Europe will threaten Europe as a whole".

The Austrian government has already announced it is trying to raise support for a general European Union initiative to rescue the region’s banking system. The government has set aside 100 billion euros in cash and guarantees to stabilise its banking sector. Next in line in terms of exposure are Italy ($232 billion), Germany ($230 billion) and France ($175 billion).

Unicredit is publicly rather dismissive of the problem (as can be seen from the slide below which from a presentation they gave earlier this week, please click on image to see better), but Italian investors are far from convinced by their arguments, as witnessed by the fact that their stock has plunged 41 percent this year, and by the fact that they were forced to sell 2.98 billion euros in 50 year bonds this week to shore up their Tier I capital after investors only bought about 4.6 million shares, or 0.48 percent, from their most recent rights offer. UniCredit, which said last month it is considering asking for government assistance, has also been disposing of assets to raise money and it plans to pay shareholders their dividends in yet more shares. Nationalisation of banks to supply credit lines to the private sector is one hypothesis currently being studied by Silvio Berlusconi, according to a Financial Times report this morning.

(Click on image for better viewing)
The Austrian proposal includes funds from the European Investment Bank, the European Central Bank and the EU Cohesion Fund. The Austrian government has offered money of its own and has been urging Germany, France, Italy and Belgium as well as the EU itself to contribute. One feature, however, stands out in all of the proposals which have so far been advanced: they are loan based-support. What Soros calls the "tricky question" of fiscal allocation from Europe's richer member states has not so far been raised, but it will be, since it will have to be.

And of course, Austria's concern is far from being altruistic, as Austria's economy and sovereign debt stability depend on finding a solution. It is hardly surprising to learn that credit-default swaps linked to Austrian government debt soared this week - by 39 basis points to a record 225 - on concern the country will need to bail out the domestic banks itself as they report losses and writedowns linked to eastern European investments. Erste, which said last week that full-year profit probably slumped by almost 26 percent, is in talks with the government to get 2.7 billion euros ($3.4 billion) in state aid. RZB has asked for 1.75 billion euros.

The European Central Bank on the other hand, seems reluctant to extend emergency financial help to crisis-hit countries beyond the 16-country eurozone. The ECB did not have “a mandate to be a regional United Nations agency”, Yves Mersch, governor of Luxembourg’s central bank, recently told the Financial Times. Such comments reveal the level of resistance which exists within the ECB’s 22-strong governing council to the idea of offering financial support to countries outside the zone.

The ECB has so far offered loans to Hungary and Poland, but has attached what some consider to be excessively strong conditions on facilities allowing them to borrow up to 5billion and 10billion euros respectively. Mr Mersch, whose views are thought to be widely shared in the ECB, suggested the central bank was worried about setting precedents if it relaxed its stance on helping individual countries. While some euromembers might favour assisting nearby nations, “we must not forget that other people might be sensitive to different countries”.

Who Bails Out The West European Banks In The East?

Governments and EU officials are struggling to formulate a coherent response to the economic and financial turmoil that has started to engulf the eastern part of the old continent. EurActiv presents a round-up of national situations with contributions from its network. Leaders of EU countries from central and eastern Europe will meet on 1 March ahead of an extraordinary summit on the same day with the bloc's other members, it emerged on Thursday (19 January). Polish Prime Minister Donald Tusk has invited his counterparts from the Czech Republic, Slovakia, Slovenia, Romania, Bulgaria, Lithuania, Latvia and Estonia for the talks to ensure the 27-nation meeting on the financial crisis is not dominated by the interests of Western member states. See full Euractiv article on background.

The EU has so far provided emergency balance-of-payments assistance to two of the East European member states in difficulty - Hungary and Latvia, and EU ministers did agree in December to more than double the funding available for such emergency lending to 25 billion euros ( so far Hungary has been allocated 6.5 billion and Latvia 3.1 billion). It is also quite probable that such lending will now have to be extended to the two newest southeast European members, Romania and Bulgaria, since their ballooning current account deficits and dramatic credit crunches mean that they are steadily getting into more and more difficulty.

The core of the problem is that the East European economies enjoyed strong credit driven booms, which fuelled higher than desireable inflation and lead to strong foreign exchange loan borrowing which simply bloated current account deficits. Now capital flows into emerging Europe have dried up as the global financial crisis has raised investors' risk aversion and prompted them to dump emerging market assets, leaving foreign-owned banks as the only source of loans for companies and consumers.

Italy's UniCredit, the biggest lender in emerging Europe, warned at the end of January that there was a clear risk of the global credit crunch gripping the region. UniCredit board member Erich Hampel stated at a Euromoney conference in Vienna that the bank was committed to fund its subsidiaries in the CEE countries and would continue to lend, but at the same time made absolutely clear that in order to do this his bank would need government support, whether from Austria, or Poland, or Italy itself.

Hampel said Bank Austria would decide during the first quarter whether to tap the Austrian government's banking stability package for fresh equity. " he said. "Our budget is under discussion now and clearly assumes growth in lending and in funding to the East. "

And according to a report from the Austrian central bank the fact that a relatively small number of Western European groups - including three Austrian ones - own most of the banks in Central and Eastern Europe means that there is the risk of a "domino effect", implying the crisis would spread quickly from one country to another. "How capital flows into (emerging Europe) will develop depends on the financial strength of the parent groups and of the sister banks, and on whether the parents are willing and able to fund their subsidiaries," the bank's half-yearly Financial Stability Report said. "The risks to refinancing are increased by the danger of a domino effect, because a large part of the foreign capital in many countries comes from a relatively small number of Western European banks," .

"What we see is that the emerging European economies have lost all sources of funding but banking," said Deborah Revoltella, chief economist for central and eastern Europe of UniCredit, the region's biggest lender. The task to carry whole economies through a downturn comes at a time when parent banks already face a double challenge: a likely sharp rise in loan defaults at their eastern subsidiaries and more difficult and expensive refinancing for themselves. "The international banks cannot solve this situation," Revoltella said. "They can do their part, and it's fundamental that they do their part but we have to take care of the other sources of funding which are missing now."
And it isn't only Austria who is worried, since Greek central bank governor George Provopoulos warned Greek banks only last Tuesday against transferring funds from the country's bank package to the Balkans, where they have invested heavily.

Regional Risks

In our view GDP growth is like to be negative in all CEE countries this year. In those countries “least” affected by the crisis (i.e. Poland, the Czech Republic, Slovakia and Slovenia) GDP is like to drop at least 2-5%, while those countries worst affected (i.e. the Baltic States, Bulgaria, Romania and Ukraine) are likely to face double digit declines in GDP. In other words, in terms of expected output lost in the region this is as bad as or even worse than the Asian crisis of 1997-98.
Danskebank - CEE: This Looks Like Meltdown

The problem that the EU has in adressing the situation in the Eastern member states is that what we have on our hands is not only a banking crisis, there is also a strong credit crunch at work, one which is now having a severe impact on the real economies in the region. Most of the economies in the region are already in recession, and those that are not soon will be (I have intersperced a number of relevant graphs throughout this post which should give some general impression of what is happening). Thus these countries are all taking multiple hits at one and the same time.

1/ In the first place they have an economic contraction on their hands, in some cases becuase they are struggling with a steep decline of export demand from western Europe, in others because their externally financed credit boom has now come to a sharp and painful end.

2/. Most countries in the region have some form of foreign currency exposure, although at present this is largely household and corporate rather than sovereign. In a number of countries -notably Hungary, Romania, Bulgaria and the Baltics this is particularly onerous since most of the mortgages were taken out in euros or Swiss Francs, and the default risk is now rising as their economies either deflate (internal devaluation) or their currencies fall as part of the regional sell-off. The danger is that as the bailouts are implemented at local level this exposure is steadily transferred over to the sovereign level, creating a dangerous dynamic which can endanger future eurozone membership. States which default will be unlikely candidate members.

3/. These countries are also suffering the impact of significant asset writedowns, as those assets bought at very high prices during the boom - some at up to six times their book value - now have to be written down, further weighing on earnings and weakening financial and corporate balance sheets.

4/ Finally there is significant contagion risk. The comparatively small number of foreign lenders involved has lead IMF economists and the credit ratings agencies alike to repeatedly warn of how the risk that a seemingly isolated incident in one country may rapidly spread right across the region.

"I don't think it's an exaggeration to say that the whole banking sector and financial system (in the region) rests on the response of parent banks," said Neil Shearing, economist at Capital Economics. "If they withdraw funding it's not very difficult to see how there would be a very severe financial crisis sweeping across the region, and the whole region en masse would have to go to the IMF," he said.

Governments in the region have already taken what measures they can. Most increased deposit guarantees from 20,000 to 50,000 euros following the EU October Paris meeting. Lithuania went further and upped the limit to 100,000 euros, while Slovakia, Slovenia and Hungary all now offer unlimited protection. But this begs the question, who guarantees the government guarantees in the event they are called on.

So the problem has now become a very delicate one, since the banks want to maintain their presence in the region even while almost every factor imaginable is working against them. The latest such factor is the threat of credit downgrades for their core business in Western Europe, and Moody’s Investors Service warned only this week that some of Europe’s largest banks may be downgraded because of loans to eastern Europe, a warning which sent Italy's UniCredit to its lowest level in the Milan stock market in 12 years.

Moody’s argues there will be “continuous downward rating pressure” in the region as a result of worsening asset quality and western banks’ reliance on short-term funding. UniCredit’s Bank Austria subsidiary earned almost half its pretax profit from eastern Europe in 2007, Raiffeisen International Bank-Holding almost 80 percent and Austria’s Erste Group Bank more than 60 percent, according to Moody’s.

“The most risky parts of the western European banks’ businesses are in eastern Europe and when you decide to cut risks, you cut back on the most risky assets first,” Lars Christensen, an analyst at Danske Bank A/S in Copenhagen, said by telephone today. “This could add further risk in the region as the economies there may face large current account deficits if funding from western European banks is withdrawn.”

As a result last Tuesday we saw a surge in the cost of protecting bank bonds from default, lead by Raiffeisen International Bank-Holding and UniCredit. Credit-default swaps on Vienna-based Raiffeisen climbed 26 basis points to a record 369 and those for UniCredit soared 23 basis points to an all-time high of 213, according to data from CMA Datavision in London. Credit-default swaps on Erste increased 24.5 to 307, Paris- based Societe Generale rose 6 to 116 and KBC in Brussels was unchanged at 240, according to CMA prices.

The rising cost of insuring against default by a “peripheral” European government is likely to weigh on the euro, according to Merrill Lynch & Co. “This remains an important background negative for the euro,” Steven Pearson, a strategist in London at Merrill Lynch, wrote in a note today. “European banking-sector exposure to Eastern Europe, often via foreign currency lending, is an additional euro negative story that is gaining air-time.” Emerging market central banks may move away from holding European government bonds in their reserves as widening yield spreads between debt of different euro-zone economies makes bonds more difficult to trade, Pearson said.

So Why Would The Euro Help?

Well, in the first place, four of the Eastern economies - Bulgaria, Latvia, Lithuania and Estonia, are effectively stuck, since their currencies are pegged to the Euro. They are in the unenviable position of being stuck between the proverbial rock and the hard place. They are now faced with US depression type economic slumps, and massive internal wage and price deflation all at the same time. Would Euro membership help? Well lets look at what the IMF said in their most recent report on the stand-by loan arrangement for Latvia.

Accelerated adoption of the euro at a depreciated exchange rate would deliver most of the benefits of widening the bands, but with fewer drawbacks. Unlike all other options for changing the exchange rate, the new (euro-entry) parity would not be subject to speculation.

By providing a stable nominal anchor and removing currency risk, euroization would boost confidence and be associated with less of an output decline than other options.Euroization with EU and ECB concurrence would also help address liquidity strains in the banking system. If Latvian banks could access ECB facilities, then those that are both solvent and hold adequate collateral could access sufficient liquidity. The increase in confidence should dampen concerns of resident depositors and also help stem non resident deposit outflows.

However, this policy option would not address solvency concerns and has been ruled out by the European authorities. If combined with a large upfront devaluation, there would be an immediate deterioration in private-sector solvency, which could slow recovery. Privatesector debt restructuring would likely be necessary. Finally, the European Union strongly objects to accelerated euro adoption, as this would be inconsistent with treaty obligations of member governments, so this option is infeasible.

Basically, devaluating the Lat and entering the euro directly was the IMF's preferred option for Latvia, "euroization with EU and ECB concurrence" was the second option, and keeping the peg and implementing massive internal deflation only the third. The problem was that the EU, in its wisdom felt euro adoption "would be inconsistent with treaty obligations of member governments" - as would I suppose bailing out Austria and Ireland be "inconsistent with treaty obligations of member governments under the Maastricht Treaty. Go tell it to the marines, is what I say!

And this is not just Latvia, but four entire countries (little ones, but still countries) that are effectively being thrown to the wolves here.

Downward Pressure On Currencies, Upward Pressure On Interest Rates

Nor is the position of those with floating currencies - Poland, Hungary, the Czech Republic and Romania - much better, since their currencies are now coming under substantial pressure, and as a result defaults are growing, defaults which will only work their way back upstream to the Western Countries whose banks will have to stand the losses.

At the same time, the risk of a sharper, 1997 Asian-style adjustment cannot be excluded, given the similarities between Asia before the eruption of the crisis there in 1997 and the situation in emerging Europe. Beyond any considerations about valuation, the FX market may overreact as it did during the Asian or Russian crises in 1997 & 1998. To halt the downward spiral of currency depreciation, a substantial rise in interest rates combined with a tight fiscal policy under an IMF programme could be necessary.
Murat Toprak & Gaelle Blanchard, Societe Generale

Obviously there is now a sense of urgency here, and the warning signs are everywhere, for those who know how to read them. According to Zbigniew Chlebowski, the chairman for the Polish ruling party’s parliamentary group speaking in an interview earlier this week, the Polish government has been in official talks with the European Central Bank over joining the pre-euro exchange-rate mechanism “for several days.” So consultations are getting to be fast and furious.

And Hungarian, Polish and Czech government debt, which has been among the highest rated in emerging markets, is now being downgraded by bondholders. Investors are currently demanding 20 basis points more yield to own Hungary’s bonds than similar-maturity Brazilian debt, which is rated four levels lower by Moody’s Investors Service, according JPMorgan bond indexes. The risk of Poland defaulting is currently running at about the same as Serbia, ranked six levels lower by Standard & Poor’s, based on credit-default swap prices, while Czech 10-year bonds yield the most compared with German bunds since 2001.

“Everybody is running for the door,” said Lars Christensen, head of emerging-market strategy at Danske Bank A/S in Copenhagen. “The markets have decided the central and eastern European region is the subprime area of Europe.”

The currencies of these currenciies are tumbling on investor concern the region’s economies are among the most vulnerable to the global credit crisis. Poland’s zloty has fallen 35 percent against the euro since August, the forint - which has fallen around 13% since the start of the year, and about 25% since last August -weakened to a record low of 309.71 this week. At the same time the Koruna hit the lowest level since 2005.

(Chart above - Polish Zloty vs Euro)

The zloty has risen - against the previous trend - by 3.2 percent this week, following a decision by the Finance Ministry to enter the market (on Wednesday) and started selling euros from European Union funds for zlotys. Prime Minister Donald Tusk said yesterday the currency must be defended “at any cost.” The Czech central bank stated it regards the buying and selling currencies to manage the koruna as an “exceptional” tool that it’s resisted using since 2002, with the implication that it may not be able to resist much longer, although interest rate hikes (as practised in Hungary) seem to be the more likely approach in the Czech Republic. Such gains as have been obtained for the zloty are likely to be short lived (intervention is a tool of desperation, not of strength, and rarely has any lasting effect) and they can hardly exhaust EU funding they badly need to spend on stimulus type projects in the face of the downturn defending the indefensible, as Russia has been learning to its cost in another context.

“It [currency intervention ]is for us an exceptional tool at our disposal,” Tomas Holub, head of its monetary policy department, said in a telephone interview today. “Of course it’s one of the potential tools, but so far no decision has been taken in this direction.”

After intervention the only real tool left is interest rate policy, and fear of further currency falls is now acting as a serious brake on monetary policy as the pace of economic contraction gathers speed in one country after another. “A lowering of interest rates at the current levels of the exchange rate is completely out of the debate,” Deputy Governor Miroslav Singer told E15 newspaper earlier this week. “The question is whether to raise, and by how much.”

Really the suggestion that all these countries simply traipse off to the IMF (one after the other) in search of help is shameful. There is simply no other word for it, shameful. As Oscar Wilde put it, losing one child may be an accident, but losing all your children, now that has to be negligence! Let them in, and let them in now, before the whole house of cards collapses on top of each and every one of us.


This article is the second in a series of five I am in the process of writing on ways forward with Europe's financial and economic crisis.

The first was Why We Need EU Bonds.

Subsequent articles will deal with:

a) The need for Quantitative Easing In The Eurozone
b) What might a new Stability and Growth Pact look like?
c) Why as well as rewriting the banking regulations we also need to do something about Europe's demographic imbalances.

Update: The Danskebank View

With which I wholeheartedly agree.

This week the crisis in the CEE markets has intensified dramatically after the publication of a number of reports putting a negative focus on Western European banks’ exposure to the overly leveraged CEE economies. The crisis is clearly developing in an explosive fashion and there is a very clear risk of an Asian crisis style meltdown. The economies in the region are already in free fall, and at least one country – Ukraine – is dangerously close to sovereign default. Rapidly rising concerns have led policy makers across Europe to call for immediate action to avoid a dangerous collapse that potentially could spill into the euro zone. However, policy makers seem very divided on what to do in the current situation.

Earlier this week Lithuanian Prime Minister Andrius Kubilius called for coordinated action from the EU to try to solve the problems in CEE. Later in the week the World Bank’s president Robert Zoellick echoed Kubilius’ cry for help.

However, the EU Commission does not seem very excited about a coordinated effort to avoid meltdown. Rather Joaquín Almunia, EU monetary affairs commissioner, this week said that he would prefer a country-by-country approach to crisis management. In our view, a country-by-country approach to crisis management entails a number of risks, as there is a strong potential for contagion from one CEE country to another due to the significant integration in the financial sector across the region. Therefore, we think that there is urgent need for a more coordinated effort to stabilise the situation– otherwise this crisis will drag out and uncertainty remain elevated for an extended period.

Friday, February 13, 2009

Hungary's Second Recession In Two Years Worsens

Hungary's gross domestic product fell by 2.1% year on year in the fourth quarter of 2008 following a 0.7% increase in Q3, according to the first estimate by the Central Statistics Office (KSH). Quarter on quarter GDP fell by 1.0% GDP, even more sharply than the 0.5% (revised) contraction in the third quarter. The Hungarian economy has now registered quarterly contractions four times in the past eight quarters. And the worst is yet to come. According to most economists' estimates, GDP could contract by anything between 3% and 5% in 2009.

“The breakdown is not available yet but farming was no doubt a major booster (around 2.5pp according to our estimates) and without this massive effect, GDP would have collapsed by 4.5% y/y - and that's a a big figure."
Gábor Ambrus, 4Cast, London

“Note that in H2 2008, the economy received a significant boost from the agriculture sector, which makes the underlying picture even worse and bodes ill for 2009." “We now think that the Hungarian economy is likely to shrink by 4-5% in 2009, especially given the central bank's reluctance to cut interest rates and let the forint weaken more sizeably."
Bartosz Pawlowski, Toronto Dominion Bank, London

“The bad news is that recession is set to further deepen in the course of 2009. Especially the first half of the year will cater with nasty figures (GDP decline in the neighbourhood of 5% yoy). The Hungarian government is not in the position to implement any anti-cyclical fiscal policies, just on the contrary: necessary fiscal measures (i.e. expenditure cuts, VAT hike) aiming to further reduce the budget deific to below 3% of GDP only add to the miseries of the current recession times locally."
Zoltán Török, Raiffeisen, Budapest

“Consumption is negatively affected by increasing debt burden of households due to Forint depreciation, increasing unemployment and slightly declining real wages. However, we expect that net export will contribute positively to the GDP this year despite falling exports. In 2009 we expect that GDP would contract by 3.2% but downside risks are mounting..."
Gergely Suppan, Takarékbank, Budapest

Industrial Output Behind The Contraction

We don't have too many details on the GDP breakdown at this point, but a few things are very evident. In the first place the sorry state of Hungary's industrial output.Hungarian industrial production fell the most in December since at least 1991 as a recession in western Europe cut export demand. Production dropped 23.3 percent from a year earlier, the seventh consecutive monthly decline, after falling 9.9 percent in November. Output fell 14.6 percent in the month.

And the output for the coming quarter doesn't look any better, since Hungary's manufacturing purchasing managers index (PMI) fell once again to a all-time low of 38.6 in January, down from 40.8 in December, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) today. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hasd been above the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year.

The January figure is the lowest recorded since September 1995 and is a further sharp drop from January. The last time the January index was below 50 was in 2005 (48.5) and then in 1997 (49.1), but these contraction were much softer.
“In view of the current situation we can confidently say that the five month negative record of 1998 will be broken. We are facing the gravest crisis of the manufacturing industry in almost 15 years," the HALPIM said.

Export Fall Drives Industrial Contraction

Hungary posted a trade deficit of 76.3 million euros in December 2008, compared with a surplus of 109.3 million euros in November and a deficit of 128.9 million euros in Dec 2007. December exports totalled 4,370.5 million, down a massive 17.3% year on year, compared with an already large decline of 10.2% in November. The last time Hungarian exports contracted at this sort of rate was in December 2001 (-14.7%), but that was more of a one-off in an otherwise growing trend. Exports for the whole year were up by 5.5% year on year. Imports were running at to 4,446.8 m illion euros in December, 17.9% down on December 2007, (as compared with a 10.3% year on year drop in November). Imports were up by 5.2% in 2009.

Retail Sales Continue To Fall

But it isn't only external demand which is driving Hungary's economy downwards. Internal demand has been falling for some time now, and retail sales were down again in November, falling by 0.4% month on month (compared with a -0.1% drop in October). On a calendar adjusted basis, there was a 2.0% year on year fall (as compared with a 1.4% decline in October).

The decline in retail sales is ongoing and continuous, and in fact sales have been dropping since the middle of 2006, that is for nearly three years now.

Unemployment On the Rise

Unemployment is also on the way up, and the rate rose to 8.0% in the last quarter of 2008. The number of unemployed rose to 337,100 while the number of employed dropped tp 3.88i million in the fourth quarter (compares with a three month moving average of 3.908 million in the September-November period and 3.909 million in Q4 2007. The number of unemployed was up by 7,500 from the previous 3-m period and by 9,300 from Oct-Dec 2007.

According to data provided by Eurostat, the harmonised jobless rate was 8% in the euro area, 7.4% in the EU-27 and 8.5% in Hungary in November.

Hundary's employment rate (ie % of relevant population employed) for 15-64 year olds was 56.7% in the last three months of 2008, against 57.1% in the preceding three months and down 0.4ppt from the same period in 2007. KSH also said in their last report that 48.6% of all unemployed have been seeking jobs for a year or more and that the average duration of joblessness was 18.5 months.

The demographics of all this is that Hungary's working age population is now in long term decline.

While the employment trend is also down.

As is the total population.

As Disinflation Continues Deflation May Now Be Very Near

The net effect of all this contraction in demand is a tendency towards price deflation, and as might have been expected Hungary's consumer prices rose 0.6% month on month in January and 3.1% year on year. Core inflation fell to an annual 3.4% in January from 3.8% in December.

In January compared to December food prices increased by 2.2%., with seasonal food items (potatoes, fresh vegetables, fruits) up 13.1%, cheese and fruit and vegetable juice up 3.7, as well and edible oil 2.9%. Food prices excluding seasonal food items were up month on month by 0.8%. Administered prices like postal services (+6.8%), local transport (+5.6%), refuse disposal (+5.2%) were all up sharply. Consumer durable goods, on the other had (+0.5%) and energy like electricity, gas and other fuels (+0.4%) were up much more moderately. Prices decreased for clothing and footwear (minus 5.0%), and other goods ( minus 0.7%). Within other goods the price decrease for motor fuels was 3.9%. What this means is that since October the core CPI index has hardly moved, and are on the verge of going negative.

Producer Prices

Hungary's industrial producer prices dropped by 0.9% month on month in December 2008, coming down from +0.1% in November. Year on year the producer price index fell to 5.8% from 7.1% in November. In 2008 as a whole, industrial producer prices went up 5.3%.

Domestic price inflation was 8.3% year on year in December (vs. +10.8% in November) and in monthly terms prices fell by 1.6%, against a 1.3% increase in the previous month. Export prices fell in December to 3.9% year on year (from 4.4% in November). In monthly terms they fell 0.3% as compared with a rise of 1.1% in November. So while we are far from outright price deflation in producer prices at this point, at definite disinflation is certainly to be observed.

The forint traded at 296.3 per euro at 10:43 a.m., from 298.17 following the consumer inflation news. The forint weakened to a record of 304.5 against the euro on Feb. 4 on deepening concern over the size of the country’s recession.

As Gábor Ambrus suggests (see below), this near zero price movement is quite remarkable given the fact that the forint has in fact devalued against the euro by nearly 25% since last August (see chart above). This gives us some indication of the impact of falling demand on the level of output and hence on prices.

“The good news is that the prices of durables were down by 0.1% y/y, despite the significant weakening of the forint, The key question here is that this is because the negative output gap limits the FX pass through or whether the collapse of demand means that the old stocks still last and until they last prices are kept on short leash. We will need a bit more data to see this but no doubt, sooner or alter the FX will kick in here, the only issue is how much the weak growth will limit the transmission."
Gábor Ambrus, 4Cast, London

GKI Confidence Index

Hungary’s economic sentiment index plunged to a record in January as businesses struggled with falling orders and consumers braced against job losses because of the global economic crisis, according to the GKI institute. The overall index fell to minus 39.8, the lowest since the survey began in 1996, down from minus 36.7 in December. Concern about future job losses dragged the consumer confidence index to a record of minus 66.1 from minus 60.8 in December.

OTP's Woes

Also Bloomberg report today that the European Bank for Reconstruction and Development is in talks with Hungary's OTP bank. The bank may also seek funds from Hungary’s emergency loan package from the International Monetary Fund, the European Union and the World Bank, according to Chairman and Chief Executive Officer Sandor Csanyi. OTP is one of the six European banks with heavy lending exposure in the East.

OTP net income in the fourth quarter of 2008 dropped to 1.7 billion forint from 51.6 billion forint a year earlier. The bank plans “substantial” job cuts as loan growth stagnates this year. There will be about 500 job cuts in Hungary and at least 100 in Russia, with reductions in other markets as well. Among OTP's key markets OTP’s key markets, Hungary and Ukraine, have recently been forced to seek international aid to avert defaults, while Russia and Bulgaria have had their debt ratings reduced. OTP has units in Ukraine, Bulgaria, Croatia, Russia, Slovakia, Romania and Serbia.

The bank’s earnings “show the first signs of real asset quality deterioration, namely in Ukraine, where they tripled,” Peter Vidlicka, an analyst at Prague-based research firm Wood & Co, said in a note to investors. “Similar deterioration is still likely to come to other markets.”

This news follows the recent announcement of an arrangement between the Swiss National Bank and the Hungarian central bank of a euro-Swiss franc swap agreement to provide Swiss franc funding to banks in Hungary.

"The Swiss National Bank (SNB) and Magyar Nemzeti Bank (MNB) are today announcing the establishment of a temporary euro-franc swap arrangement......This facility, like the ones existing between the SNB, the European Central Bank and Narodowy Bank Polski, will allow the MNB to provide Swiss franc funding to banks in its jurisdiction in the form of foreign exchange swaps," according to the statement from the Swiss National Bank.

What this means in effect is that the guarantee package available to banks, boosted to a new total of HUF 1,500 billion, will now be available to banks in a slightly modified format. The original IMF loan included HUF 600 billion available for bank bailouts, 50% of which was earmarked for capital injections leaving the other 50% available for state guarantees for commercial banks. The government have thus boosted this original HUF 300 billion (1 billion euros) guarantee fund to HUF 1,500 billion (5 billion euros), but since most of this extra funding would have been backed by Hungary (with only the small original part by the IMF), the credit rating would have been primarily determined by the Hungarian sovereign rating, thus making the credit more expensive. Thus Hungarian commercial banks will be able to issue bonds directly backed by the IMF (with OTP at the top of the list of hopeful recipients here).

Erste Bank, for example, received a government guarantee from the Austrian governmnent for 90 bp. The state guarantee for a Hungarian commercial bank would cost something in the region of 150-200 bp. But if the Hungarian loan conditions are just slightly less favourable than the Austrian ones (Erste has obtained the guarantees on an extremely favourable bass), a more realistic estimate might be approximately 300-400 bp for OTP Bank. Thus a HUF 400 billion guarantee at 350 bp would cost HUF 14 billion a year, meaning the bank would spend about 7% of its profit on the deal.

Monday, February 02, 2009

Central Europe's Manufacturing And Consumers In A State Of Shock

Central Europe's economies continued to contract in January - lead by their manufacturing industries - under the combined weight of a credit crunch and a slump in demand for their exports. My feeling as all three economies - Poland, the Czech Republic and Hungary - are now in recession. Hungary's is clearly the worst case, and events are moving rapidly and negatively there, but the slowdown in the Czech Economy is also very pronounced, and Poland seems finally to be falling into line, following some internal financial chaos back in October. Based on back of the envelope type calculations derived from the PMIs I would say their economies were contracting at the following pace in January.

Q-o-Q Y-o-Y
Hungary -1% -4%

Poland -0.7% -3%

Czech Republic -1% -4%

These are only provisional assessments based on the PMIs and Consumer Confidence Indexes. They will be subject to calibration as we move forward and receive the real data, but all this should give us some general idea of what is happening, something which is badly needed in view of the suddenness of the change.

Hungary PMI

Hungary's manufacturing purchasing manager index (PMI) fell once again to a all-time low of 38.6 in January, down from 40.8 in December, according to the Hungarian Association of Logistics, Purchasing and Inventory Management (HALPIM) today. Any PMI index figure above 50 indicates expansion while a figure below 50 shows contraction in economic activity. The index hasd been above the critical 50 mark for more than three years before it dropped below (to 42.6) in October last year.

The January figure is the lowest recorded since September 1995 and is a further sharp drop from January. The last time the January index was below 50 was in 2005 (48.5) and then in 1997 (49.1), but these contraction were much softer.
“In view of the current situation we can confidently say that the five month negative record of 1998 will be broken. We are facing the gravest crisis of the manufacturing industry in almost 15 years," the HALPIM said.

GKI Confidence Index

Economic sentiment also plunged in January with the GKI index falling to a record. The overall index fell to minus 39.8, the lowest since measuring began in 1996, from minus 36.7 in December. The sub components for business and consumer confidence also fell to new lows.

The outlook for industrial production and orders led a decline in the business confidence index to minus 30.5 from minus 28.2 in December. The outlook for export orders improved “minimally,”. Fifty-eight percent of exports are sold in the euro region, which is in its worst recession since the single currency began trading a decade ago. Concern about future job losses dragged the consumer confidence index to a record of minus 66.1 from minus 60.8 in December.

Polish PMI

Morale in Poland's industrial sector rose for the first time in almost a year in January, but output growth remained mired firmly in negative territory, according to a purchasing managers' index survey published Monday. The survey of 300 industrial companies prepared by Markit for ABN AMRO showed Polish manufacturing PMI increased to 40.3 in January, from 38.3 in December. This is an improvement, but the contraction is still a strong one.

"Though slightly improved from the exceptionally weak December data, the latest survey findings underline the headwinds confronting Polish manufacturers in January. Output, new orders and employment all contracted sharply and, overall, the first batch of 2009 PMI data point to further aggressive rate cuts by the central bank in the first quarter following greater than expected reductions in the main policy rate in both November and December. Inflation concerns have eased despite the falling zloty, as the PMI showedfurther falls in price pressures in manufacturing." - Trevor Balchin, Economist at Markit Economics
Polish Consumer Confidence

Poles have become much more pessimistic about the outlook for their economy in recent months and the Ipsos Consumer Confidence Index fell by 11 points to 84.17. The assessment of the current economic climate suffered the most serious deterioration.

(Please click over image for better viewing)

The consumer rating of the current economic climate plummeted by 15 points to hit 69.59. This is one of the lowest levels since Poland joined the European Union. Consumers are worried about the future of the Polish economy, and their worries are linked particularly to the situation on the job market. Currently some 52% of Poles expect unemployment figures to rise over the coming 12 months, while only 6% expect them to fall. This is a radical change, particularly when compared with January 2008, when only 13% expected a rise in unemployment and 39% expected a decline.

The deterioration in consumer sentiment was also to be seen in the ratings for willingness to buy, which in January fell by 8 points to 93.88 (the lowest level for 3 years). In particular expectations regarding the material situation of one's own household deteriorated. Ratings of the current situation in regard to buying durables also weakened somewhat. Nevertheless, consumer appetite is far from dead, and there are more people still considering this a good time for buying than those who disagree.

Czech Republic PMI

Czech industry continued its steep decline in January with the Czech Purchasing Managers' Index falling to dropping below the 50 mark (to 31.5) for the seventh consecutive month. As compared with December (32.7), the PMI was hit by series-record declines in new orders and employment, while deflationary pressure was also evident as both input and output prices continued to fall sharply, according to the report from Markit Economics and ABN Amro. The figure for output rose for the first time since September, to 29.5, indicating a slightly weaker rate of contraction than in December but still the second lowest in the survey's history.

Czech Consumer Confidence

In January 2009, the Czech economic sentiment indicator decreased by 3.2 points m-o-m (it was down by 8.6 points down in December). The business confidence indicator fell by 2.8 points and the consumer confidence indicator dropped 4.8 points. Compared to January 2008, the composite confidence indicator balance was down 30.8 points, the confidence of entrepreneurs is 34.7 points down and the confidence of consumers is down by 15 points. Indicators were thus at their lowest levels in almost ten years.

The survey taken among consumers in January indicates that, compared to December, consumers expect for the next twelve months worsening of the overall economic situation and a slight decrease in their own financial standing. In January, the share of respondents expecting a rise in unemployment increased again. The percentage of respondents planning to save money decreased. The consumer confidence indicator decreased by 4.8 points, m-o-m; it is by 15 points down, y-o-y.